Five Things: The Dollar is Doomed

By Kevin Depew  SEP 08, 2009 3:48 PM

I know this because I have read it everywhere over the past few weeks.

 


The Dollar is Doomed... Macro Forecasting Isn't for the Gutless... The Dollar, Technically... How to Handle the Point of Recognition... Twitter Reveals a Longing for Depth by Virtue of its Absence.


The dollar is doomed. I know this because I have read it everywhere over the past few weeks...

UN Wants New Global Currency to Replace Dollar
- Telegraph (UK)

U.N. Panel Calls For Dollar Reserve Role To Be Eliminated
- Wall Street Journal

Dollar Hits Low for Year as Gold Tops $1,000
- Associated Press

Pimco Says Dollar to Weaken as Reserve Status Erodes
- Bloomberg

Wait, that's not true. I haven't read this over the past few weeks; it's been over the past few years. Longer than that, really. But never mind how long it has been coming, what is important is that it is finally here. The question, then, is what comes next:

 

Here's the most likely scenario. In the next recession, it will appear that deflation and unemployment are threatening the public welfare. Washington will react in panic fashion to attack the problem by cranking up the money and spending machine to "stimulate" the economy - a bit of the "hair of the dog that bit us." These distortions in the economy, and the dollar floods coming from the printing press, will cause Americans to distrust their own paper currency and get rid of it as fast as they can in an orgy of spending...


It's an interesting thesis, to be sure. And it could still play out that way. After all, that passage was written 30 years ago by Howard J. Ruff  in his 1979 book, "How to Prosper During the Coming Bad Years."

You might have missed it the first time around if, like me, you were just a little kid, in which case, friend, do I have good news for you, an updated version of Ruff's classic, "How to Prosper During the Coming Bad Years... in the 21st Century," was released just last year.

Reading the headlines over the past few weeks, the timing looks good. And I guess that's really the point: the mere fact that the timing looks good is probably the chief reason that it isn't.

Look, I understand. The macro-economic book publishing business is not for the weak-kneed and gutless. You have to be flexible, adaptive, able to change your position when it is clear you are wrong. Which is the only way you can get a boldly optimistic book like this one, published in 1999...


The Roaring 2000s: Building The Wealth And Lifestyle You Desire In The Greatest Boom In History




Followed immediately by this one, published by the very same author, in 2009...

The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History



At least he's got all his bases covered.

To be fair, I have my own far-ranging macro-economic thesis, but I also have the good sense not to try and charge anyone for it since, by definition, once you accept money for a point of view you're totally and absolutely committed to selling it... come hell or high water, and no matter whether it's right or wrong.

But let's get back to the dollar, after all, that's what everyone is concerned about these days.

The fundamental reasons for why the dollar is doomed are well known by virtually everyone, and that's why for the most part I totally ignore them and focus on the technicals. Technically, the dollar is approaching a major bottom. This is probably because deflationary pressures, debt revulsion and balance sheet repair are going to intensify, but no one really knows that for sure.

The Dollar, Technically

The dollar is very near bottoming, just as gold is very near topping, but this is a longer-term process, not an event. Looking at the dollar on multiple time frames, we should have a TD Sequential buy signal record on the daily chart this week. However, I expect that move to be somewhat muted and short-lived because there remains unfinished business on longer-term time frames that require lower prices first.

The monthly and quarterly charts are the time frames I am most focused on. As you can see in the two charts below, we are very near TD Sequential buy signals that are long-term in nature. When these record, I believe it will mark a major exhaustion point for the US Dollar. However, as the charts below show, this will require an important leg down.

USD Index, quarterly

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The level required for a quarterly TD Sequential Countdown buy signal is 76.695 on a quarterly basis.

USD Index, monthly
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The level required for a TD Sequential Countdown buy signal is 72.509 on a monthly basis.

Looking at these longer-term time frames, it is clear to me that within the next six months we have a high probability of seeing the trend toward a lower dollar and higher gold exhausted. Over a similar time frame, we have the possibility that stocks reach new lows and also mark an important bottom.

It is very interesting to see these things begin to come together. One scenario the majority of people would find unimaginable is for stocks and the dollar to bottom together and rally concurrently. Something to keep in mind. But the more probable scenario is an intensifying period of deflation.

How to Handle the Point of Recognition

If the deflationary thesis is correct, the point of recognition will result in the simultaneous decline of virtually all financial assets. Under those circumstances, shopping for bargains among the rubble will the last thing anyone wants to do. It will simply be accepted that buying financial assets is "a sucker's game" and a "losing proposition."

This point of recognition is a difficult concept to grasp, especially given the length and magnitude of the secular bull market in social mood and, consequently, financial assets, that brought us to this point.

Bear markets exist to “re-adjust” and re-price inflated assets. The conventional wisdom, that there is always something to buy in a bear market and sell in a bull market, is grounded in a nugget of truth: manias typically conclude with one asset extremely overvalued at the expense of another asset that is extremely undervalued. But this present mania has created the overvaluation of all financial assets.

So what is left that is undervalued? Intangible assets; relationships, time, quietude, reflection - objects/ideas that are difficult to define and whose value deflated in the mania of accumulation of all manner of consumables and financial assets.

The takeaway is not that consumption is dead. That's a severe overstatement, which is fine when selling macro-economic pop finance books. But consumption as a signifier is certainly in trouble, and not only because social mood is trending in a new direction but because that negative trend itself entails a new form of signifying that will displace the primacy of currency and accumulation.

The Death of Literature

To go hand-in-hand with this social mood shift, I ran across two essays today decrying the death of literature and language in the long form. The first, "Jame Joyce Does Not Exist," considers whether a classic like James Joyce's Ulysses would ever have seen the light of day from a modern publisher.
 

"So, then, it becomes confusing to me, in this reckoning, when I think of how most any of these books, if approached today, would not exist. I can’t think of most any publisher, even the major and innovative independents, that would release Ulysses again right now, if instead of an accepted masterpiece, it were a third book by some Irish guy who had published a collection of short fiction and a weird novella."


The second, "How Twilight Killed "The Wasteland" from Examiner.com, takes apart a piece from Lev Grossman in the Wall Street Journal, "Good Books Don't Have to Be Hard."

"Relax. Grossman's thinking is reductive, cowardly, but mostly just silly."

We could do to relax just a bit. That goes for all of us, including macro theorists and novelists. The reason the topic of literature is important to me is that it is one of the older forms of cultural expression and intimately - less a pun than a fact -  bound up with social mood.

We've just experienced a multi-decade wave of increasing risk appetites, which trends toward high-frequency in all things; music, art, fashion, sports, literature, media. With high-frequency comes time compression and reduced attention spans.

In some respects, Twitter is the culmination of the social mood trend in media toward high-frequency, reduction and compression. It's difficult to stand back from Twitter, view it side-by-side with a novel like Ulysses and conclude things are going to work out very well for the budding James Joyce. But it will.

As part of this major Socionomic shift, we'll see a dramatic mean reversion against high-frequency and compression in communication. It's already well underway in some areas (see: the slow food movement).

The irony of Twitter is that it actually services this trend - toward more thoughtful, longer media - by magnifying the absence of thoughtfulness and length in every 140 character post. Every immediate thought fired out there reveals depth and personal intimacy by virtue of  their absence, an absence that is screaming for attention. 

No positions in stocks mentioned.

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